The oil price rally could be 'sowing seeds of its own destruction'

The commodity’s seen a nice rally in light of a weaker US dollar, stronger economic data from China, decreasing non-OPEC production, and a continued rise in demand.

In fact, since their February lows, both WTI and Brent crude have rallied by about 60%, and are now trading around $44 per barrel.

Although this may seem like great news for oil producers and investors, Capital Economics’ commodities economist Thomas Pugh noted that the “oil price rally could be sowing [the] seeds of its own destruction.”

“…We think almost all of the tightening of the oil market set to occur this year is already priced in to the market,” he argued. “The danger is now that prices rise so much that they actually prevent the market from rebalancing.”

For what it’s worth, we saw something similar happen last year. Prices rose at the start of the year, and then fell, which you can see in the chart to the right. Although, we should note that the fact that something happened in the past, does not necessarily mean it will happen in the future.

Ultimately, Pugh writes that his team’s base case scenario is that the oil market will rebalance at the end of this year.

“We would not be surprised if prices continued to fall over the next few weeks and months before trending higher in the second half of 2016.”